Scotland’s Future: Economic Policy Choices in an independent Scotland

Cabinet Secretary for Finance, Employment and Sustainable Growth, John SwinneyPolicy Scotland Annual LectureBoyd Orr Building, University of Glasgow10 December 2013

Introduction

Thank you Principal for your introductory remarks.

It is a pleasure to speak this evening at Policy Scotland’s inaugural annual lecture on a topic which is at the heart of the independence debate. There can be no more important time for dispassionate discussion and debate on the future of our country.

I have no doubt that the work undertaken here will help bring a new perspective to some of the key public policy challenges and the choices facing Scotland, both domestically and internationally.

Two weeks ago we published Scotland’s Future – Your Guide to an Independent Scotland. At 670 pages it is the most comprehensive blueprint of the approach to be taken to the establishment of an independent country.

We have also recently published a 200-page report setting out the economic opportunities that independence will bring to Scotland.

Taken together with the 4 reports from the Fiscal Commission Working Group, our Economic Prospectus and Balance Sheet publications this sets out details of the wide range of economic policy choices available under independence.

It may be a daunting task – over 1000 pages of answers and information on the economics of independence but I would encourage everyone to read these documents. They are designed to inform and enrich the debate in which we are all involved.

So far it has been striking that there have actually been a number of key areas of agreement.

Both Yes and No agree that Scotland could be a successful independent country.

Both agree that we have huge potential, immense natural resources and a wealth of human talent.

Scotland has more top universities per head of population than any other country in the world and what better place to make that point than here at the University of Glasgow, we have thriving growth sectors such as food and drink, life sciences, creative industries, tourism and many others.

And one interesting fact that has been repeated by both the Scottish and the UK Governments. Even if every penny of oil and gas revenues were excluded from Scotland’s national accounts, then our tax revenues per head are virtually on a par with the UK’s as a whole.

The foundations for an independent Scotland are therefore strong – nobody in this debate seriously disputes that point.

Case for independence

So everyone agrees that Scotland could be independent so this evening I want to talk to you about why Scotland should be independent.

The case is based on a simple but, I believe, compelling premise.

It is better for everyone if decisions about Scotland’s future are taken by the people who care most about Scotland – that’s the people who choose to live, work, study and operate businesses here.

No-one else has a bigger stake in our country’s success and no-one else will do a better job.

We have an insight into the substance of that with the analysis of the impact of devolution on key economic indicators, both in absolute terms and relative to the rest of the UK.

Since 1999:

• Productivity – measured as output per hour worked – has increased from 2% below the UK average to matching it.

• Scotland’s unemployment rate has moved from being 1.0% higher than the UK rate in 1999 to being 0.4% lower in 2013.

• Scotland’s employment rate has moved from a position of 2.4 percentage points below the UK to 1.0 percentage point higher in 2013.

• And on the most recent data available, Scotland’s economic growth rate is 1.8% compared to 1.3% for the UK as a whole.

This analysis demonstrates that with limited powers over our economy we have been able to deliver a better economic performance in Scotland. This has been made possible by our ability to take distinctive decisions that suit our circumstances and reflect our choices.Nowhere is the difference in our approach clearer than in the area of education and skills - culminating in free higher and further education tuition, our opportunities for all initiative, support for Modern Apprenticeships and Maintaining the Education Maintenance Allowance.

On economic development we have taken a distinctive approach by retaining Scottish Enterprise, Highlands and Islands Enterprise and SDI – a decision that is frequently credited with growing our key sectors and securing our leading place on foreign direct investment indicators

Next steps

The lesson of 14 years of devolution is that self-government has been good for Scotland. I applaud many of the decisions taken by my predecessors in the Labour-Liberal coalition - decisions that were different from south of the border but were taken not for that reason but because they were right for Scotland. I simply want to ensure that on 18 September next year we take the next steps to enable us to take further decisions that are right for Scotland across a wider range of issues.

I want to see us take forward proposals for independence that would see us build Scotland’s future on our own resources, ingenuity and skills. I want to see us in a position to take decisions emanating from the financial strength that comes from us generating 9.9% of UK revenues , more than both of our population and expenditure share. Scotland has also generated more in tax revenue per person than the rest of the UK in every year since 1980.

I want us to take on the capability to deliver a level of performance that would rival that of other small independent nations.

If, starting 50 years ago in 1963, the Scottish economy had grown at the average growth rate of comparable European countries – then by 2007 our GDP would have been 42% higher. And those patterns of growth in other small European nations have been achieved whilst delivering greater levels of inclusion and equality than we have managed to achieve.

At the very least we need to ask ourselves – why have those independent countries managed to grow their economies more quickly and in a more sustainable way than Scotland?

Although much has been achieved under devolution and can continue to be achieved, I have found it frustrating that I have been unable to take all of the steps I would have wanted to take, to stimulate the economy at its moment of greatest need.

When the UK entered recession, this Scottish Government took the firm view that we needed significant action to support the economy.

Unfortunately, our recovery in Scotland has been hindered by the United Kingdom Government. In 2010, the Chancellor had a choice, which we contested, but instead of following our advice to invest in infrastructure, he reduced capital expenditure.

This damaged the prospects of a swifter and more sustained recovery.

Last week’s autumn statement – showing growth 5.9% lower than was predicted in 2010 and borrowing £197bn higher shows the size of that lost opportunity. That is the cost of Westminster’s misguided economic policy.

In total, Scotland’s capital budget will have been reduced in real terms by 27% over the period 2010-11 to 2015-16.

As far as possible I took action to mitigate the full impact of these capital budget cuts on the Scottish economy – including through switching spend from resource to capital, and continuing to progress the £2.5 billion Non-Profit Distributing (NPD) pipeline of revenue funded investment.

By using all the levers at our disposal to maximise investment, these measures reduced the full scale of the impact on the Scottish economy and our approach taken in Scotland is delivering results. While deeply damaging we know our recession was shallower than the rest of the UK

And the most recent figures show that over the year to the second quarter of 2013, Scottish output grew by 1.8 per cent compared with 1.3 per cent for the UK as a whole.

But ultimately we have been tied to the UK’s approach to fiscal consolidation and it has damaged our recovery.

So while we have been able to temper the effects of recession with the limited powers of devolution, there are clear merits in holding a range of further powers that could equip us to meet challenges and make the most of the opportunities in the years ahead.

Currency and Europe

Before I go on to outline the economic opportunities in an independent Scotland I will briefly address two areas that have been the subject of much discussion and particularly the focus of those arguing against Scottish independence – the choice of currency and membership of the European Union.

The Scottish Government’s views on the currency are founded in the extensive work of the Fiscal Commission which recommended that it would be in the best interests of both an independent Scotland and the rest of the UK to continue to use the pound in a currency union.

We come to this view based on the logical and rational consideration that a Sterling zone makes sense given the compatible performance of the Scottish and rest of the UK economies and because of the significant trade and business activities cross the border in both directions, and we firmly believe that view will prevail after a successful outcome to the referendum.

I only ask you to consider why the UK government would do anything to damage the interests of UK businesses in the event of a Yes vote.

Is it reasonable to suggest that Westminster would seek to introduce exchange rate differences when the rest of the UK exports an estimated near £60 billion of goods and services to Scotland?

Why would the UK Government impose an unnecessary transaction cost on businesses?

An agreement on a sterling area offers a clear way forward that gives both an independent Scotland and the rest of the UK fiscal, employment and other key economic powers while establishing a macroeconomic framework that works for both parties. When we apply common sense to the argument, the only reason the UK can even talk of rejecting such an arrangement must surely be political rhetoric.

On Europe, once again it is frankly inconceivable that the EU would seek to expel 5 million European Union citizens against their will, simply because those citizens have chosen to use their right to self-determination.

Such a course of action would run contrary to the very ethos on which the European Union is built.

And in any case there is nothing in any of the treaties that would provide for such an outcome.

Sir David Edward, the eminent former British judge at the European Court of Justice and a self-proclaimed “moderate unionist” has explained it like this;

He makes it clear that there is an obligation for member states to negotiate Scotland’s continued membership from within the EU between the point of a Yes vote in September 2014 and the moment of independence in March 2016.

In the absence of Treaty provisions to cover this event, that is the proposition we set out in “Scotland’s Future” by using Article 48 of the European Treaty to negotiate Scotland’s transition from membership of the EU as part of the UK to membership of the EU as an independent member state.

On the issue of the EU I also make this point. Under the status quo the Prime Minister has promised an in/out referendum by the end of 2017. The polls are telling us it is perfectly conceivable that businesses in Scotland could find themselves taken out of the EU courtesy of the decision of the UK Government - even if a majority here votes to stay in. So the question of EU membership transcends the referendum and is a pertinent question for those contemplating a future within the UK.

Opportunities

Within the framework of a monetary union and membership of the EU, independence would create the opportunity for Scotland to pursue a more productive, resilient and fairer economic model. A model focused on delivering sustainability and economic opportunity for all and not just a targeted few.

Through the transfer of additional powers, future Scottish governments could create a genuinely appropriate set of complimentary policies - whether in relation to taxation, innovation, labour market regulation or industrial policy - under an overarching national purpose aligned with Scotland’s unique strengths and preferences.

Our aim is to create prosperity through a genuine social partnership between business, the public sector, trade unions, the third sector and universities; and for that prosperity to be distributed more fairly and more equally than it is at present.

A country of Scotland’s size is well placed to build consensus in the key strategic areas and deliver policy which best meets the needs of the Scottish economy and Scottish business.

Business plan – steps we can take to grow the economy

As I indicated earlier, last month we published a detailed paper on economic policy choices for an independent Scotland and illustrated the opportunities to build a more competitive, resilient and fairer economy.

The paper covered a wide range of areas, and put forward a series of possible policy choices should independence be secured.

Tonight I will take the opportunity to outline four specific areas:

• Rebalancing the economy to promote innovation and productivity;

• Building a labour market policy which meets the needs of the Scottish economy and creates opportunities;

• Putting in place an effective tax system; and

• Boosting internationalisation.

Rebalancing the economy to promote innovation and productivity

On the first of my themes - Rebalancing the economy to promote innovation and productivity – an independent Scottish Government would be in a much strengthened position to establish an industrial strategy.

This involves using the full spectrum of tax, regulatory and public spending levers – to rebalance the economy and diversify Scotland’s industrial base - promoting manufacturing, innovation and productivity.

Within our devolved responsibilities, we are already taking action to support rebalancing – in particular the development of Scotland’s renewable energy sector.

This action has been acknowledged in a recent study by Cardiff University, Queens University Belfast, Robert Gordon University and Birmingham University which concluded that “devolution has played a significant role in the expansion of renewable energy deployment in the UK, with Scotland leading the way on renewable energy delivery”.

Promoting productivity is key.

Even relatively small improvements in productivity can have significant impacts on economic performance. For example, Scottish Government analysis estimates that boosting labour productivity by just 1% could raise employment in Scotland by over 21,000 over the long-term.

But while Scotland has a relatively strong base of innovation to build on – with a clear tradition of scientific expertise, a highly-skilled workforce and world renowned universities – there is clearly room for significant improvement. As a proportion of GDP, Denmark and Finland spend nearly twice as much on R&D as Scotland does.

Independence will provide us with the opportunity to look at the full package of support that can encourage innovation.

Finland is an excellent example of a country which has established a coherent and all-encompassing approach to its innovation system, with collaboration between universities, businesses, and public sector agencies.

At the centre is an innovation agency which provides grants, tax incentives, funding and other support to businesses and research institutions undertaking R&D activity.

Business investment on R&D in Finland in 2011 accounted for over 2½% of GDP, compared to ½% of GDP in Scotland. Overall, Finland has the 3rd highest total expenditure on R&D as a percentage of GDP in the OECD.

The careful and targeted use of tax credits and allowances in an independent Scotland could make a difference and break down the barriers which limit private investment in R&D and greater harness the acclaimed research in our Universities.

Such incentives could be targeted at either R&D related expenditure or income that results from investment in R&D or to support more effective collaboration between different players.

But it is not just direct support for innovation that is important.

Ensuring that we have the best talent available is also vital.

A new visa system is essential to ensuring that we can attract and retain the best skilled students and researchers from across the globe to help take forward such innovation.

For example, independence will enable us to re-introduce a post-study work visa to encourage young talent to contribute to the Scottish economy.

The visa would allow recent graduates from overseas – educated by our great universities like Glasgow - to remain in Scotland, and to work or set up a business - retaining skilled and educated young people as part of Scotland’s labour force.

Labour market

The second of my themes is participation in the labour market.

Devolution has shown what can be achieved with greater access to the levers that support the labour market.

Scotland has an enviable track record on education, skills, and world renowned universities. We already have a collaborative approach in Scotland designed to match the needs of businesses.

Independence would allow us to establish truly transformational policy initiatives to boost Scotland’s economy to boost participation in the labour market.

Parents in the UK face some of the highest childcare costs in Europe.

This cost, and also the availability, of childcare is often a barrier to participation in the labour market.

Employment levels for females with pre-school age children are lower in Scotland than in many other European countries – including Sweden, Denmark, Norway and the Netherlands.

In these countries the focus is generally on investment in the supply of childcare services, rather than on subsidising demand.

Our approach to childcare, which is set out in Scotland’s Future, will enable more people, particularly women, to participate in the work force.

The potential benefits from boosting labour market participation are considerable. For example, it is estimated that an increase in Scotland’s economic activity rate of 1 percentage point would be equivalent to an extra 30,000 plus people in the labour market.

Why can’t we do that now? Why is this linked to independence?

Last week I was asked to use the Barnett consequentials from school lunch provision in England to pay for more child care provision in Scotland, to dual the A9 and to pay for free school lunches. A sustainable transformation in childcare cannot be funded on consequential handouts from Westminster. As we have seen, and as I regularly have to wrestle with budgets from Westminster go up and go down – the money there this year, may not be there next year. We will always do our best to achieve the maximum use of our resources but we must have a sustainable solution and that is to control our finances.

Increased access to free childcare is not only of benefit to children, but also to the economy as it increases the number of people able to work and delivers benefits to the public finances.

Currently – and even under the limited tax powers offered in the Scotland Act - the revenues from increased participation – as well as the reduced level of welfare payments they might currently receive – go to Westminster.

As an illustration, if we grew our four largest tax receipts by 1% and reduced core welfare spending by 1% - for example by increasing the number of people in work - this would benefit the public finances by around £350 million. However, under the Scotland Act Scotland will only directly get back £45 million of this.

Under independence that money stays in Scotland and can be used to help pay for the expansion of childcare.

Our investment in childcare will also be funded from the savings and increased revenues laid out in ‘Scotland’s Future’, including reducing defence and security spending to £2.5 billion per year and ending the married couples tax allowance.

It’s the sort of transformation that we can only imagine under devolution. With independence, it’s one that we can implement.

Independence would also allow future Scottish governments to deliver more efficient and joined-up employability, welfare and skills

We could better align skills and training programmes, making sure we have the right people with right skills are identified for our new economic opportunities. Tax and welfare systems which are crucial consideration in motivating people out of inactivity and into work could be better aligned to support people into work.

Tax system

The third of my themes is taxation.

Here, there are two aspects.

The first is the efficiency of the overall tax system.

Both the Institute for Fiscal Studies and our Fiscal Commission have highlighted how independence would provide the opportunity to re-design the current complex and costly UK tax system.

An efficient tax system could be a major international competitive advantage for Scottish businesses and support investment, jobs and growth.

This makes sense not only for business but also for government. Our intention is to reduce compliance costs, streamline reliefs and help to reduce tax avoidance, with the ambition of yielding a target revenue gain of £250 million a year by the end of the first term of Parliament.This approach has already been applied to the tax bills on land and buildings transaction tax, landfill and the soon to be introduced legislation to establish Revenue Scotland. Showing what we can do and the benefits that emergeThe second aspect is that, within this overall framework, independence would also allow us to design a tax regime targeted to the needs of Scottish business.

As an example of the type of policy choices that an independent Scotland could make, we have set out our intention to put in place a targeted but responsible cut in corporation tax to boost output and employment.

A reduction in the rate of corporation tax by up to three percentage points would help to counter the gravitational business pull of London - an initiative that is estimated to create approximately 27,000 jobs;

At the same time, tax incentives could be carefully targeted to encourage certain types of activity.

For example, boosting international connectivity through initiatives such as reforming Air Passenger Duty; encouraging investment through capital allowances, and supporting small businesses through initiatives such as National Insurance Employment Allowances for small businesses are all practical propositions available under independence..

Future Scottish governments could also provide targeted support for key sectors – with recent examples discussed in Scotland including the video games industry, tourism and creative industries, where countries such as France and Ireland have introduced specific measures.

While all such policies would have to be affordable the key argument is that the prioritisation of such choices would be undertaken in a manner which reflect Scotland’s circumstances and the needs and priorities of businesses in Scotland.

International profile

The final theme is internationalisation.

Boosting internationalisation is already a priority in our Economic Strategy and we are working hard to promote Scotland’s brand in the global market place.

For example, we have already put in put in place a strategy for increasing food and drink exports.

Scotland has performed strongly in recent years in attracting international investment – the Ernst & Young UK Attractiveness Survey 2013 shows that Scotland accounted for 16 per cent of UK Foreign Direct Investment (FDI) job creation in 2012 – well above our per capita share - and was close to topping the UK table for a third consecutive year

However, with independence, we could do even more.

It would allow us to integrate our industrial and business strategy with trade, foreign policy and international engagement in order to provide a real opportunity to take advantage of the status of a newly independent Scotland on the global stage and to promote international investment and trade.

It would provide the opportunity to build on our current Team Scotland approach and strengthen policy coherence across the public, private and third sector actors.

Such collaborative and aligned approaches to trade promotion and international engagement have been pursued by a number of successful small countries including Finland, Singapore and New Zealand.

The impact of an improvement in Scotland’s export performance on the wider economy could be significant.

Scottish Government analysis estimates that a 50% increase in the value of Scottish exports could boost output by around £5 billion and create over 100,000 jobs in the long-term.

This can be achieved by boosting Scotland’s presence on the international stage and providing greater brand recognition for Scotland’s economy and businesses.

It can be achieved by better organising the structures that support trade to deliver a more efficient and joined up approach which makes decision-making less bureaucratic, time-consuming and costly.

Post-independence Scotland would also be able to strengthen existing and establish new relationships with key elements of the international economic community – including multilateral organisations such as the European Union, the United Nations and the World Trade Organisation.

We would be able to better represent Scotland’s interests as a full and equal partner in the European Union, allowing us to influence the development of the rules and regulations that support the effective operation of the single market.

The recent successes of the Irish and Danish Presidencies have highlighted how small member states can be successful at shaping and influencing policy at a European level.

For example, Ireland’s 2013 Presidency of the EU is widely credited with having focused the efforts of the EU and its institutions on youth unemployment.

The choices available to us

The Referendum next September is fundamentally about choice - what choice do we want to make about our future. There is a clamour in this debate for there to be an informed choice presented to the public - and as a principal participant in the assembling of the case for Independence I feel we have given substantial and substantive material to the debate to enable that informed choice to be made.

But in making that choice, the public must also be aware of what is involved in voting No in the Referendum. I think that is becoming increasingly clear.

Continuing on the current path is to follow a model that will see Scotland’s budget being cut by 10 per cent in real terms over the current five year spending review period with plans to extend the cuts to public services until at least 2018-19.

As a result of these cuts, day-to-day spending on public services and administration is expected to fall to its lowest level, as a share of national income, since current records began in 1948.

In addition to the cuts that the UK Government has already announced, it is becoming increasingly clear that the Westminster establishment now have their eyes set on the future of the Barnett Formula. If Scotland votes against independence the word coming from England and Wales is that it should be replaced with a mechanism, principally the Holtham methodology, which would potentially see the Scottish budget cut by £4 billion a year.

Remaining with the status quo is also to remain part of one of the most unequal countries in the developed world. That means opportunities and social mobility are restricted and talent is needlessly wasted.

And we would be depriving ourselves of the ability to counter the increasing concentration of business activity and policy focus on growth in London and the South-East of England.

The UK Government itself has expressed concern over what it believes is an unbalanced model and the danger to stability that this situation presents.

But despite the public pronouncements about the need to rebalance, output per head in London is now 70 per cent higher than the UK average.

The share of manufacturing in the UK has fallen sharply and the UK is ranked 30 out of 35 advanced economies for investment as a percentage of GDP as we increasingly rely upon consumption and borrowing to drive economic growth.

There is no evidence that the current UK system is able to deliver a better geographic balance or that it will put the interests of the wider UK before those of it’s economic powerhouse of London and the South East.

It is my belief that, for the long-term, it is essential that we have the tools to give businesses here a competitive edge and encourage an outward-looking, global focus to provide as many opportunities for all here in Scotland. That is something we can only achieve with independence.

Summary

In summary, with independence comes a wider range of responsibilities and opportunities to develop a new economic model to deliver sustainability and economic opportunity for all.

We know that successive Scottish Parliaments have legislated for progressive purposes, passing world leading homelessness legislation, taking action to tackle Scotland’s health inequalities and reintroducing free university tuition.

The successes of devolution – the gains we have enjoyed from having independent decision making powers - demonstrate fully that the best people to take decisions on Scotland’s future are the people who live and work in Scotland.

Under independence, the choice to do things differently – and better – would lie with us. We could look at the way issues are tackled in a new light, with a broader range of options and opportunities to take a different course.

We recognise that it is not only the powers to vary individual policies, but the ability to design a consistent approach to supporting key sectors and to implement a fully co-ordinated economic policy. That is the prize in the independence debate.

It would mean strong new relationships between Scotland and the rest of the United Kingdom – taking our own decisions, but working together on issues of common interest such as sharing Sterling and working together on issues such as financial stability.

I have outlined how independence would create the opportunity for Scotland to pursue a more productive, resilient and fairer economic model – to combine powers over business investment, employment creation, and taxation to secure stronger levels of economic growth from which all the people of Scotland could benefit.

Businesses and universities in Scotland will have their own ideas on policies in an independent Scotland and will help to secure its future economic success.

Finally I look forward in the coming months to a debate about what is possible and achievable in Scotland, about what our ambitions should be. This is an opportunity that is open to very few countries and I look forward to hearing these ideas as we move towards Scotland’s historic referendum on 18th September 2014.